The First Step of the Capital Flow from Institutions to Entrepreneurs: the Criteria for Sorting Venture Capital Funds


  • The authors would like to thank anonymous referees, as well as Douglas Cumming, Jean-Marc Suret, Mike Wright, John Doukas (the editor), and the participants of the 2010 EFM/Cirano Symposium Entrepreneurial Finance & Venture Capital Markets for their valuable inputs. We are grateful to the numerous institutional investors having participated in our survey and to Karsten Lieser and Elmar Zimmermann for their research assistance. We appreciate the financial support from the International Center for Financial Research (CIIF) at IESE Business School, Barcelona.


We contribute to the knowledge of the capital flow from institutional investors via venture capital (VC) funds as intermediaries to their final destination, entrepreneurial ventures. To this end, we conduct a world-wide survey among limited partners to determine the importance of several criteria when they select VC funds. We find the top criteria to be the expected deal flow and access to transactions, a VC fund's historic track record, his local market experience, the match of the experience of team members with the proposed investment strategy, the team's reputation, and the mechanisms proposed to align interest between the investors and the VC funds. A principal component analysis reveals three latent drivers in the selection process: ‘Local Expertise and Incentive Structure’, ‘Investment Strategy and Expected Implementation’, and ‘Prestige/Standing vs. Cost’. It becomes evident that limited partners search for teams which are able to implement a certain strategy at a given cost. Thereby, they focus on an incentive structure that limits agency costs.